How do banks assess the risk of loan defaults?

Banks assess the risk of loan defaults primarily by evaluating a borrower's credit history and financial stability. Credit history provides insight into the borrower’s past repayment behavior, including any defaults or missed payments, and indicates how reliable they are in managing debt. This includes examining credit scores, which synthesize this information into a single metric that reflects a borrower's creditworthiness.

Additionally, financial stability encompasses factors such as the borrower’s income, employment status, and overall financial situation. By analyzing these elements, banks can estimate the likelihood of the borrower being able to repay the loan. This comprehensive evaluation allows banks to make informed lending decisions that mitigate the risk of defaults, ensuring they maintain sound lending practices and safeguard their financial interests.

The other options do not adequately cover the full spectrum of risk assessment. Simply evaluating economic conditions is limited and does not capture individual borrower behavior. Relying solely on social status fails to provide a complete understanding of financial capability or borrowing history. Lastly, customer surveys may gather subjective opinions but lack the quantitative data needed for a thorough financial assessment. Thus, option C encompasses the multifaceted approach banks utilize to assess lending risk effectively.